Multi-year policies and financial incentives key to getting firms to take loss prevention measures

Multi-year insurance contracts and financial incentives may be the key to getting firms to invest in loss prevention measures, said Howard Kunreuther, professor of decision sciences and public policy at the Wharton School, University of Pennsylvania.
Kunreuther was a panel member on the Risk and Insurance Management Society’s webinar, ‘Flirting with Natural Disasters.’ The webinar, sponsored by FM Global, explored how human perceptions and behavioural barriers obstruct risk managers and their organizations from addressing vulnerabilities to natural disasters.
FM Global’s vice chairman, Rudd Bosman, noted during the webinar that firms that do not have loss prevention practices in place tend to have losses that are nearly five-times more costly than those firms that do have loss prevention practices in place.
Bosman pointed to an FM Global study that was done following Hurricane Katrina. Of the losses FM Global incurred as a result of the storm, locations that had invested in improvements – ensuring that roofs were properly nailed down, for example – had an 85% loss reduction. These “risk improvements” cost approximately $7,400 per site, he added.
The investment seems small in comparison to the financial losses following a natural catastrophe, but people tend to focus on the short-term, and will take positive action after an event, not before it occurs, said Kunreuther.
He said that in California, take-up on earthquake insurance is always greatest following a quake. After a few years of not having a claim, people cancel their policies, no longer feeling an immediate threat.
“These [traits] are pervasive at the level of the consumer and the level of the firm purchasing insurance,” he said.
“Multi-year insurance contracts enables one to think about doing things in the long run,” he said. “But, you also have to develop some short-term incentives to deal with myopia and the problems associated with people not taking action.”
Kunreuther suggested linking taking loss reduction measures with receiving a discount on premium, as an example of such an incentive.
“If at the same time you can get a long-term loan to cover the costs of those loss prevention measures, and have multi-year policies, the premium reduction that you’ll get each year should be greater than the cost of the loan each year, if it’s a cost-effective measure.”